"RISKY LOANS"....http://www.ocregister.com/articles/students-379257-corinthian-company.html......
Last year, Corinthian suddenly raised tuition by 12 percent. Executives didn't hike prices because costs had gone up. Instead, they worried that the company was in danger of missing federal targets.
For-profit schools can get no more than 90 percent of their revenues from federal student-aid programs; Corinthian has been in frequent danger of exceeding that mark. Under the law, surpassing that level could make its students ineligible for additional federal grants and loans – a devastating blow to the company's business.
To remedy the problem, the company has sometimes simply raised tuition, forcing students to put more of their own cash toward their education or to take out a private loan.
Massimino said the 12 percent tuition hike coincided with Congress' decision to raise the amount of federal aid for which students could apply, which in turn increased the company's federal revenues and took the company closer to the 90 percent limit.
"We have to raise pricing to re-create a gap," he said.
It wasn't the first time that Corinthian had used this technique. In 2010, executives told Wall Street analysts that they were considering a tuition increase of up to 20 percent at various campuses to avoid going over the 90 percent limit.
Yet Corinthian gets so much federal student aid – $1.7 billion in 2010 – that even these tuition hikes have not been enough. To get more students to take out private loans, the company has made it easy to get one. So easy, in fact, that the default rate on these loans is roughly 50 percent.
To count as part of the revenues that don't come from the federal government, the private loans must be made by a third-party lender. But to get a private lender to give its less-than-creditworthy students these loans, Corinthian has had to guarantee that it will pay if its students do not.
Most businesspeople would hesitate to lend people money if they knew that half of the sum would never be paid back. But to Corinthian, these risky loans are essential to its bottom line: They help keep the company below the 90 percent limit and keep it eligible for hundreds of millions of taxpayer dollars.
Corinthian is not the only company to employ this strategy. Many for-profit colleges have similar private lending programs.
But the practice has a growing number of critics, who point out that the private loans often have interest rates higher than those of federal loans. Corinthian told students in 2011 that the loans' interest rate was as high as 14.9 percent with an added 6 percent loan-origination fee. The company says the rate has since been reduced.
Defaulting on these loans can haunt students for years.
"Each charge-off represents an individual who cannot repay a debt and who may be facing aggressive collection tactics," wrote Deanne Loonan, an attorney with the National Consumer Law Center in a report last year detailing the industry's private lending tactics. "These student borrowers generally face numerous collection calls, lawsuits and negative entries on their credit reports that can last for extended periods of time."
And Corinthian's students are not just defaulting on these private loans. The overall default rate for its students on federal loans has been climbing rapidly in recent years. The average default rate for all its campuses jumped from 23 percent in 2005 to 36 percent in 2008, according to the U.S. Senate committee. The industry average is 22 percent.
A school's default rate is a critical measure of whether taxpayers are getting their money's worth from the loans they provide to students. A high rate is a sign that students did not get an education that led to a good job. Excessively high default rates make campuses ineligible for federal student-aid programs. Beginning in 2014, schools must not exceed a 30 percent default rate for three consecutive years or 40 percent in a single year.
Corinthian executives have found ways to lower default rates even if students aren't paying. They announced in 2010 that they would begin investing $10 million a year on what they called "default management." They hired a company called General Revenue Corp., a subsidiary of Sallie Mae, to "cure" students who were not making payments on their loans. Under the plan, a loan was "cured" by encouraging the former student to agree to defer the loan or to put it into forbearance for as long as three years. Those loans then no longer count in Corinthian's default-rate calculation – at least, temporarily.
General Revenue designated 60 employees to begin calling former students who were behind on their payments. The people considered at the most risk of default – which happens if no payments are made for 360 days – would be called as many as 110 times a month, according to an internal document. Corinthian hired two other companies to send people to knock on former students' doors. It promised students at some campuses gift certificates to McDonald's if they called to discuss their loans.
Default rates have since plummeted. At the Anaheim campus, the rate fell from almost 22 percent in 2009 to 10 percent in 2010. At Everest College in Los Angeles, the 28 percent rate of default in 2009 has fallen to 7 percent."